Wednesday February 18, 01:29 PM
Germany temporarily to allow forced bank nationalisation
By Richard Carter
BERLIN (AFP) - Germany proposed drastic measures Wednesday that would allow the government for the first time in modern German history to nationalise banks by seizing their shares.
The temporary law, adopted by Germany's cabinet, gives authorities until June 30 to appropriate the assets of stricken banks but stresses that nationalisation must be a "last resort."
The draft legislation paves the way for Berlin to take control of troubled Munich-based property lender Hypo Real Estate (Xetra: 802770 - news) (HRE) -- potentially the first time a bank has been nationalised in Germany since World War II.
The concept of seizing assets from troubled companies is hotly disputed in Germany for historical reasons.
The idea is linked to Nazi seizures of Jewish property in the 1930s and East German confiscation of private business after World War II.
But Finance Minister Peer Steinbrueck told reporters the law was designed "exclusively and specifically for Hypo Real Estate," adding that it was "a damage-limitation exercise in the public interest."
It is "not foreseeable" that other German banks will need to be rescued in this fashion, the minister added.
According to the draft law, which must be approved by parliament, nationalising banks "is only permissible when there are no other reasonable legal and economic solutions available to safeguard financial market stability."
"The banking crisis has expanded into an acute crisis of the financial system. In this crisis situation, it is the fundamental duty of the state to restore trust in the financial markets and to prevent a further deterioration of the crisis," the document says.
Steinbrueck said the law aims to prevent "systemically-relevant" banks from going under. Germany fears that a collapse of HRE could trigger shockwaves throughout the country and further afield.
"Not I but others say that Hypo Real Estate could have the same effect as Lehman (Brothers)," Steinbrueck said.
The collapse of US investment banking giant Lehman Brothers (NYSE: LEH - news) in September triggered a chain-reaction that sent the financial markets into a tailspin from which they have still not recovered.
HRE has already soaked up more than 100 billion euros (126 billion dollars) in public aid since October, half of it in public loan guarantees, but is still tottering on the brink of collapse.
The bank (NASDAQ: TBHS - news) is a pivotal part of Germany's economy. In addition to its real-estate activities, HRE plays a major role in the issuance of "Pfandbriefe," bonds in which small investors, savings banks and insurance companies have placed large sums.
HRE's share price climbed sharply as news of the decision broke. At 1300 GMT the stock was up 55 percent, whereas the broader MDAX (Xetra: news) index of small-cap German firms was down nearly two percent.
As the crisis continues to rage, the nationalisation of major banks -- previously unthinkable -- is becoming increasingly seen as a palatable option in the face of the ongoing financial sector chaos.
Banks have already been nationalised in Britain and Ireland.
And the former chairman of the US Federal Reserve, Alan Greenspan, said in an interview with the Financial Times that the US government may have to temporarily nationalise the country's banks until the sector is reformed.
For its part, Germany has already thrown vast sums at stabilising its banking sector.
In October, Berlin established a rescue package to provide up to 80 billion euros in cash injections and 400 billion in loan guarantees to prevent a collapse of the financial sector.
Steinbrueck said Wednesday he saw no need to expand this programme but announced that the guarantees -- currently limited to three years -- would in future be available for five years.
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